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Social Security: Baby Boomers Should Beware of This Provision

Are you a baby boomer who has worked for both the public and private sector during your working career? If so, you are probably feeling pretty good about your retirement options, which very likely include a public pension, as well as Social Security. Unfortunately, under the Windfall Elimination Provision, you may not be eligible for all the Social Security benefits you think are coming to you.

No more "double dipping"Before 1983, people who worked in both public and private jobs could collect a full pension when they retired, as well as Social Security benefits, as long as they qualified. Benefits were calculated as though the employee had been a low-wage worker throughout his or her career.

In order to make sure that lower-paid employees are given an ample monthly payment upon retiring, Social Security is calculated in favor of low wage-earners. So not only were public employees able to retire with a pension, but any additional work in which employees paid into Social Security was calculated with maximum returns in mind.

Therefore, a retired public worker with a pension could also draw a monthly Social Security benefit based upon around 55% of private-sector earnings prior to retirement -- quite a bit more than the 25% that high-wage individuals typically get. The enactment of the WEP put an end to this "double dipping."

How it worksWhether WEP applies to you depends on a few factors. The first, of course, is that you must have worked for a federal, state, or local government, employment which was covered by pension benefits, but not Social Security -- in other words, you never had Social Security tax deducted from your pay. Secondly, you must have also worked in a job that was covered by Social Security, even if the employer also offered a pension plan.

If this is the case, you will have your Social Security benefits reduced according to the Social Security Administration's formula, which takes your inflation-adjusted, average monthly earnings, and divides them into three brackets: in approximate terms, the first $800, the next $3,300, and the amount above $4,100. The first amount is multiplied by 90%, the second by 32%, and anything left over, by 15%. Adding them together gives you your monthly benefit. It's that 90% bracket that the WEP uses to reduce your benefit.

A big exceptionYou are excepted from the WEP under certain circumstances – one of which is that you had 30 years or more of "substantial" earnings, reproduced in this chart. In order to obtain the 90%, you will need that full 30 years; the percentage drops after that. With 20 or fewer years of substantial earnings, the multiplier is only 40%.

The SSA's Retirement Planner gives an indication of how this might work. The maximum monthly reduction for someone reaching age 62 this year, with 20 or fewer years of substantial earnings, is $408.00.

A few things affect this amount, however. One is that the WEP will never be more than one-half of your non-Social Security pension; the other has to do with cost of living adjustments. The WEP will be calculated on your benefit amount before the yearly COLA is applied.

The age at which you take benefits also factors into the mix. The SSA chart represents a scenario for retirement at age 62, the earliest age at which you may collect. Retiring at your full retirement age -- or later -- will change your benefit profile accordingly.

Though you won't really know how WEP will affect you until you reach retirement age, being aware that it will be a factor will spare you any surprises later on. In addition, knowing this fact can allow you to tweak your retirement planning in order to minimize the WEP's impact.

A mix of public and private employment can influence Social Security spousal benefits, as well. I'll take a look at that issue next week, so stay tuned.

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Can someone answer for me ? The SSA website is so confusing and the staff was not much better .

I worked for the State of MA for 16 years -was vested but left at age 36 and took my retirement money in a lump sum( $14,000) so I get zero pension. This was in 1987 - I paid taxes and an early withdrawl penalty to the IRS . When I just applied for SS benefits at age 62 , I was told of this WEP provision. I never realized it would apply to me since I am nit receiving a pension.

Assuming I am going to be a victim of the WEP, there seems to be a calculator on the SSA website - IF I am figuring it correctly , based on my age at time of withdrawl and year when I took it ( prior to 2007 is the lowest on the chart ) , it seems like my pension would only have been $84 a month which seems impossible and they can only take half . I see nowhere where it says lump sums are subject to inflation in today;s dollars. Can you explain this to me ? Thanks .